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"Our industry has a reputation for selling products that can be too expensive and complex, but advisors are continuing to advocate for simplicity, transparency and choice in client portfolios."

WASHINGTON--(BUSINESS WIRE)--Advisors believe the majority of client portfolios should be allocated
to core investments1, according to “At the Core: Advisor
Views on Investment Trends,” a new study of independent advisors by
Charles Schwab Investment Management, Inc. (CSIM). On average, advisors
say 62 percent of clients’ holdings should be allocated to core
investments. More than one-third of advisors (38 percent) believe core
has an even bigger place in client portfolios, saying that core should
make up 70 – 100 percent of holdings.

“An investor’s core holdings are the foundation of their investment
portfolio, and independent advisors are focused on finding low-cost,
straightforward products for their clients to serve as those crucial
building blocks,” said Marie Chandoha, chief executive officer of CSIM.
“Our industry has a reputation for selling products that can be too
expensive and complex, but advisors are continuing to advocate for
simplicity, transparency and choice in client portfolios.”

When it comes to the investment vehicle of choice at the core of a
portfolio, advisors say exchange traded funds (ETFs) make up the largest
portion of their clients’ core holdings. Looking ahead, 69 percent of
advisors say they’ll increase their clients’ core allocation to ETFs in
the next five years.

Inside the core: product allocation today

ETFs

29%

Mutual funds

24%

Individual stocks

25%

Individual bonds

18%

Other

4%

Core outlook: how allocations will change in the next five years

Increase

Stay the same

Decrease

ETFs

69%

22%

9%

Mutual funds

53%

31%

16%

Individual stocks

52%

32%

16%

Individual bonds

46%

36%

18%

Core considerations

Advisors say that economic and market events impact how much of a
portfolio should be allocated to core holdings. Roughly half of advisors
say that tax reform (54 percent), a rise in the federal funds interest
rate (51 percent) and market volatility (48 percent) would drive a
greater allocation to core.

In addition, the vast majority of advisors (86 percent) say a clients’
level of wealth impacts how much of their portfolio should be allocated
to core holdings. That said, advisors are split on what that threshold
is, with 46 percent saying “mass affluent” clients (those with
$100,000-$249,999 in investable assets) should allocate more of their
portfolio to core holdings than “high net worth” clients (those with
more than $1 million in investable assets) and 40 percent saying the
opposite.

Core choices

Not surprisingly, the majority of advisors (66 percent) say that total
cost is the most important consideration when choosing any index fund,
whether it is a mutual fund or ETF. Looking beyond cost, advisors say
that when deciding between two funds that have the same investment
objective and price, they look to performance history (58 percent),
track record (49 percent) and an asset manager that provides great
portfolio construction education and guidance (37 percent). Notably, few
advisors chose a fund’s brand name (16 percent) as an important factor
in deciding between two funds.

When it comes to mutual fund investing, more than half of advisors (58
percent) say that low or no minimums are very important when considering
a fund. Forty-four percent of advisors say mutual funds should have a
single share class, accessible to all. Half of advisors believe everyone
should have the same access to the same lowest-cost funds, regardless of
how much they have to invest.

“Independent advisors are focused on choosing the best products to
achieve their clients’ goals without unnecessary costs or onerous
minimum investment requirements. Advisors are a bellwether for the
investing industry at large, which is heading toward greater access and
affordability,” said Jonathan de St. Paer, president and head of
strategy and product for CSIM.

Beyond the core: ETFs on the rise

Looking at the total portfolios, spanning core and non-core holdings,
more than half of advisors (52 percent) say ETFs are already the primary
investment vehicle in client portfolios and even more (64 percent) say
that ETFs will be the go-to investment type in client portfolios in the
future. That said, mutual funds continue to be important to advisors,
with 41 percent saying mutual funds are the primary investment vehicle
they use today.

Use of all-ETF and all-mutual fund portfolios is already common and
poised to rise in coming years. Half of advisors (50 percent) have
already put some client investment portfolios (excluding cash) entirely
in ETFs and about the same (48 percent) have put some of their client
portfolios entirely in mutual funds. This trend is even more pronounced
among Millennial advisors (60 percent) and female advisors (57 percent).
Looking ahead, more than a quarter (28 percent) of advisors surveyed say
they will consider all-ETF portfolios within the next five years.

At the Core: Advisor Views on InvestmentTrends by Charles
Schwab Investment Management is an online study among a national sample
of 381 independent advisors with at least $50 million in assets under
management who have traded an ETF in the past month for an account they
manage. Conducted by Logica Research (formerly Koski Research) from
August 14 – August 31, 2018, the study has approximately a three percent
margin of error. Survey respondents were not asked to indicate whether
they custodied assets with Charles Schwab & Co., Inc. All data is
self-reported by study participants and is not verified or validated.

About Charles Schwab Investment Management

Founded in 1989, Charles Schwab Investment Management, Inc., a
subsidiary of The Charles Schwab Corporation, is one of the nation’s
largest asset management companies, with more than $360B in assets under
management as of 9/30/18. It is among the country’s largest money market
fund managers based on assets under management according to iMoneyNet as
of 9/30/18. It is also the third-largest provider of index mutual funds
and the fifth largest provider of ETFs.*

More information is available at schwabfunds.com.

*Source: Strategic Insight, as of 9/30/18; based on assets under
management

Investment returns will fluctuate and are subject to market volatility,
so that an investor’s shares, when redeemed or sold, may be worth more
or less than their original cost. Unlike mutual funds, shares of ETFs
are not individually redeemable directly with the ETF. Shares of ETFs
are bought and sold at market price, which may be higher or lower than
the net asset value (NAV).